What Those Rising Taxes on Your Phone Bill Pay For: A Fraud-Friendly ‘Obamaphone’ Program

In 1993, humorist P. J. O’Rourke said, “If you think health care is expensive now, wait until you see what it costs when it’s free.” More than 20 years later, a similar thought comes to mind in looking at the Federal Communications Commission’s Lifeline program. The program was originally intended to make telephone service affordable for millions of low-income Americans, but this week the FCC will take up a proposal to expand it to subsidize broadband services as well.

Lifeline is funded by a “universal service fee” — essentially, a tax — placed on your phone bill. And since 2008, Lifeline spending has almost doubled, growing from $819 million to $1.6 billion. To finance this and other spending on universal services, the tax rate on Americans’ phone bills has increased by 83 percent over the past seven years.

The tax rate on Americans’ phone bills has increased by 83 percent over the past seven years. So where does your hard-earned money go?

So where does your hard-earned money go? Unfortunately, Lifeline, known in some circles as the “Obamaphone” program, is plagued by waste, fraud, and abuse. And ground zero for the program’s current woes is the state of Oklahoma.

Why? The typical Lifeline subsidy is $9.25 per month. But those who live on lands designated as “tribal” receive $34.25 per month, whether or not they are Native Americans. You might not think that this is a big deal, but here’s the rub. The FCC currently treats virtually all of Oklahoma as tribal land. So, for example, a non–Native American living in Tulsa is eligible for $300 more per year in phone subsidies than a low-income person in East Los Angeles or Appalachia.

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This policy ends up costing consumers a lot of money. Nationally, the Lifeline program spends about $5 per American, and in most states, the amount is less. For example, across the border from Oklahoma in my home state of Kansas, spending is only $3.14 per person. But Lifeline spending in Oklahoma is more than ten times that: $33.01 per person. This is by far the highest in the nation.

In fact, last year, Sooner State residents received more than $128 million in Lifeline funds. This was the second-highest total of any state, even though Oklahoma ranks only 28th in population. And an amazing 99.95 percent of this money subsidized phone service at the significantly higher $34.25 monthly rate. That’s right: Of the 307,434 Oklahomans receiving Lifeline support, only 339 do not qualify for the tribal subsidy, even though the vast majority of Oklahoma beneficiaries are not Native Americans.

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As a native of Parsons, Kansas, a small town near the Oklahoma border, I have a deep respect for tribal nations in Oklahoma. But this federal spending in Oklahoma is outrageous. And excessive subsidies have made the state a playground for Lifeline fraud.

Consider the case of Icon Telecom, a former Oklahoma telephone company. Icon’s owner was part of a scheme to defraud the Lifeline program out of more than $27 million. Specifically, he knowingly asked the FCC for funds for tens of thousands of phantom customers, many of whom “received” the larger tribal subsidy. The number of customers the company fabricated was astounding. In September 2011, Icon reported having 2,200 customers in the program. Just over a year later, that number was more than 135,000. Thankfully, the scheme was uncovered, and in early 2014, Icon’s owner pleaded guilty to money laundering for transferring more than $20 million from the company to his personal account.

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The FCC must act promptly to end this kind of swindle. One option would be to provide the enhanced subsidy only in tribal lands with a low population density, where telephone services are less accessible and affordable.

Lifeline is now the only FCC program of its kind without a cap on spending.

Reforming the tribal-land subsidy is just one of many problems with the Lifeline program that demands urgent attention. For instance, Lifeline needs to be placed on a budget. It is now the only FCC program of its kind without a cap on spending. A Lifeline budget will increase incentives to eliminate fraud and prevent future out-of-control spending.

We should also prohibit carriers from giving away free phone service to Lifeline recipients. When the program was created 30 years ago, it offered low-income Americans discounted service, not free service. But recently, the program has lost its way. Requiring recipients to have some skin in the game will not only discourage waste, fraud, and abuse. It will also restore the program to its original purpose: providing a hand up, not a handout.

These reforms — and others — must go hand in hand with any decision to begin providing broadband subsidies through Lifeline. For the sake of all Americans who fund the program through taxes on their monthly phone bills, we cannot expand a broken program. To put it another way, let’s not put the cart before the horse (or in the case of the Sooner Schooner, the wagon before the ponies).

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